Canada: Implications Of The Rusoro Decision For Potential Bidders And Financial Advisors

On February 10, 2009, the Ontario Superior Court granted a
temporary injunction restraining Rusoro Mining Ltd.
("Rusoro") from proceeding with a take-over bid for Gold
Reserve Inc. ("Gold Reserve"). The court's order also
restrained Endeavour Financial International Corporation
("Endeavour"), Rusoro's financial advisor, from
having any involvement in a hostile bid for Gold Reserve.

The Rusoro decision is significant because, like the recent
decision of the Ontario Superior Court in Certicom (see our
"Implications of the Certicom Decision for Confidentiality
Agreements" of January 23, 2009), it illustrates that
Ontario courts will strictly enforce confidentiality obligations
arising in the context of M&A transactions. The case highlights
the importance of careful drafting of confidentiality provisions,
and of care in management of actual and potential conflicts.

The decision arose in the context of a hostile take-over bid by
Rusoro for all of the issued and outstanding securities of Gold
Reserve. Endeavour was retained by Rusoro to provide financial
advisory services in connection with the bid. Endeavour, however,
had acted as Gold Reserve's financial advisor for the four
years preceding the Rusoro bid and, in fact, remained subject to an
advisory agreement with Gold Reserve at the time that Rusoro
launched the bid (this agreement was terminated by email seven
minutes after Rusoro publicly announced its intention to commence
the bid). The same three individuals at Endeavour who had
previously acted as advisors to Gold Reserve and had access to Gold
Reserve's confidential information were the primary advisors to
Rusoro on its bid.

The advisory agreements between Endeavour and Gold Reserve
contained confidentiality provisions requiring Endeavour to protect
Gold Reserve's confidential information, and further provided
that "...Endeavour shall not knowingly act against the
interests of Gold Reserve in a material way" and that, in the
event of a conflict, "...Endeavour will inform Gold Reserve of
the conflict and will either act solely for Gold Reserve, agree
with Gold Reserve an appropriate resolution to the matter at hand
or it will terminate this Agreement in accordance with its
terms."

Given the nature of the proceeding, the crux of the applicable
legal test was whether or not Gold Reserve had established that
there was a serious issue to be tried. The court's decision was
based on the following conclusions:

Breach of Contract – In the court's
view, Endeavour, contrary to the provisions of its agreements with
Gold Reserve, had knowingly acted against the interests of Gold
Reserve in a material way and did not inform Gold Reserve in
advance of the bid of the conflict. In addition, although Endeavour
argued that it had not had access to any non-public information
relating to Gold Reserve since the beginning of 2007 and had only
relied on public information in advising Rusoro on the take-over
bid, the court was highly suspicious of these claims and concluded
that, absent evidence to the contrary, it was not Barristers &
Solicitors / goodmans.ca plausible that Endeavour had not relied on
confidential information in advising Rusoro. In this regard, the
court emphasized the fact that the same three individuals who were
the primary advisors to Rusoro had previously been key advisors to
Gold Reserve, rejecting the argument that the individuals could
"compartmentalize their minds."

Breach of Confidence and Duty of Loyalty –
The court concluded that, in addition to its contractual
obligations, Endeavour owed a duty of loyalty to Gold Reserve and a
duty to maintain Gold Reserve's confidences.

The court expressed its view of the harm that may arise from the
misuse of Gold Reserve's confidential information: "Rusoro
and Endeavour have created an unfair imbalance of knowledge. They
have knowledge of confidential information which other potential
bidders do not have. Given the uneven knowledge base, other
potential bidders, and Gold Reserve's own shareholders, are all
at an unfair disadvantage relative to Rusoro and Endeavour."
The court cites expert testimony provided by Stanley M. D. Beck,a
former Chair of the Ontario Securities Commission, who emphasized
that absent a level playing field in terms of equal access to
confidential information, a corporation's shareholders are not
likely to achieve an active auction that maximizes value.

The Rusoro decision confirms that Ontario courts will strictly
enforce confidentiality obligations arising in the context of
M&A transactions. Additionally, the decision cautions issuers
and advisors to carefully consider and manage actual and potential
conflicts of interest.

The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.

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